There is reason to expect financial services M&A activity to pick up in Asia in 2014. The IMF forecasts that global gross domestic product (GDP) activity will expand by 3.6% in 2014 (versus the 2.9% estimate for 2013). This is a key economic indicator because the correlation coefficient between Apac M&A volume and World GDP from 2007 to 2013 is a high 0.98. That signals the likelihood of increased general M&A activity for the region as the global economy revives.
Given that banks across Asia are seeking to expand, offering more digital and online services to customers who want more mobile options, expect financial services M&A to continue to be in the limelight. Consider some of the headline transactions in 2013. Mitsubishi UFJ Financial Group's offer to pay US$7.5 billion for up to 75% of all of Bank of Ayudhya's outstanding shares and Sumitomo Mitsui Financial Group's decision to buy 40 per cent of Indonesia's Bank Tabungan Pensiunan Nasional for about $1.5 billion are indicative of Japanese banks' need to look beyond their borders to continue to build market share. As they do, they will look to offer more enhanced, digital services, as well.
Although Singapore's DBS Group ended its pursuit of Indonesia's PT Bank Danamon given the regulatory hurdles it faced - it is clear that banks across Asean are also looking at innovative ways to grow. Consider other regional ambitious forays out of home markets. Malaysia's second largest lender, CIMB Group, unveiled investment banking and brokerage services in India in April last year and launched its investment banking and brokerage business in South Korea in March.
And there is every reason to believe that domestic China financial institutions will begin to look to expand, through acquisition, beyond their borders. They will naturally follow their corporate clients and increased trade flows.
In short, it is clear that there are sound strategic rationales for deals, which is essential. Accenture has found that critical success factors include: a strong rationale for making an acquisition as well as the right methods for screening potential targets; reducing risk by conducting the right valuation and due diligence; and ensuring sound integration by mobilizing and focusing the organization on planning and executing on the deal's strategic rationale.
Asian banks investing in Asia have a potential inherent leg-up on competing Western banks on all three fronts. The rationale is clear: banks are expanding because their home markets are saturated or to follow their customers who are increasingly trading intra-regionally. Given regulatory requirements, transparency is high in financial services, so doing the due diligence is not only possible it's fairly straightforward when it is your next door neighbour and not halfway around the world. And there has been enough intra-Asia cross-border M&A activity in recent years for there to be abundant precedents for advice on how to integrate. Success stories, for example, can be found at Maybank and CIMB; both Malaysian banks have expanded aggressively in the past few years in the Asean neighbourhood and significantly increased their businesses in the process.
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